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France and Germany go it alone as the EU summit prepares to address US retaliation.

Thursday's EU summit in Brussels will likely be 25 vs 2.

France and Germany mostly agree on how to respond to the United States' enormous green subsidy plan, the Inflation Reduction Act, which will be considered in detail for the first time by the bloc's leaders.

Both French President Emmanuel Macron and German Chancellor Olaf Scholz endorse the EU's green subsidies plan with its proposed easing of state aid laws to bolster Europe's industrial base and fight back the United States. However, their reasons for doing so have enraged the other 25 EU members, who think that the bloc's two economic powerhouses are attempting to prop up their own industries at the expense of less-affluent single-market nations.

In many ways, the Franco-German reconciliation is a welcome development. A few months ago, during the height of the oil crisis, the two countries were at odds. Other countries, including France, were outraged by Germany's decision to proceed with a €200 billion domestic-subsidy scheme, while the two countries battled over the MidCap pipeline connecting Spain to Germany via France. The two founding members of the EU decided to postpone a long-awaited bilateral summit because relations were so poor.

Now they are singing from the same hymn sheet; however, the other 25 members of the bloc are not pleased.

An official from a country with concerns about the Franco-German attitude stated, "We’re rushing into taking potentially very far-reaching measures that risk running into a subsidy war with the United States and even a subsidy war with one another."

"There is a very strong push by France and Germany to go forward with these rules. We see a potentially groundbreaking transformation of the EU state aid regime — we think it’s all being done too fast and without sufficient analysis ."

Since the EU's creation, a strong Franco-German axis has been essential to its successful operation. In Brussels politics, nothing is ever accomplished without the approval of the two largest members. The problem this time is that many in the EU feel that the new flurry of effort against the IRA is a French initiative, which now has the backing of Germany, which is typically a free-trade voice at the EU table that can restrain Paris' protectionist tendencies.

This week's symbolic visit to Washington by French Economy Minister Bruno Le Maire and Germany's Robert Habeck has increased the concerns that this is all a Franco-German plot (though the two economy ministers insist they speak for the whole EU).

The issue that will be discussed on Thursday is the recent proposal by the European Commission to relax state aid regulations. Later in the year, there will be an in-depth discussion on the possibility of new money to counterbalance any moves by countries to inject cash into their own economies.

In the lead-up to the summit, smaller EU countries have united to show their disdain for the idea to weaken state aid rules, which have been viewed as a cornerstone of the single market and fair competition across the bloc.

According to a document, the Czech Republic, Hungary, Latvia, and Slovakia joined Denmark, Poland, and others in urging the European Commission to use "great caution" in the modification of its state aid rules last week.

The original signatories of the document argued that further relaxation of the bloc's state aid regime after nearly three years of crisis exemptions could "lead to significant negative effects including the fragmentation of the internal market, harmful subsidy races and weakening of regional development."

A consequence of the Franco-German push has been to pull together a motley crew of member states that are not generally on the same side of the argument in European economic matters.

"On state aid, France and Germany are relatively isolated," according to a senior official from a country that is dubious of the Commission's ideas. "Almost all other countries, including Italy for example, are pushing to preserve the internal market."

In Brussels, there are also rumblings that France, in particular, may be misrepresenting the threat presented by the IRA as an excuse to further its agenda. Simone Tagliapietra, a senior fellow at the think tank Bruegel, observed, "The risk of the IRA has been overstated by those countries that are keener on flexible state aid arrangements, for sure."

Before embarking on a comprehensive rethinking of the state assistance framework, this sentiment is shared by all national representations in Brussels, who desire a greater understanding of the exact impact the IRA will have on the European economy.

However, Germany and France remain adamant, claiming in private that Europe needs a serious industrial policy in order to compete with Joe Biden's investment plan, which includes $369 billion in climate subsidies and investment incentives.

"We won the battle of narrative, of storytelling on these issues because talking about European industrial policy is very new in reality," an Elysee official said in advance of Thursday's summit, expressing the Parisian perspective that subsidy discussion has now entered the mainstream.

As EU leaders prepare for the one-day summit, the atmosphere is already heated.

This week, Germany accused the Commission of distributing "misleading figures" regarding state aid payments in France and Germany. It follows claims made by Competition Commissioner Margrethe Vestager last week that the two countries account for over 80 percent of state aid allowed under the looser state-aid framework implemented during the COVID-19 era.

Sven Giegold, Germany's state secretary at the economy ministry, noted that not all of the state aid money approved by the Commission has been spent; however, the fact that Germany and France have been deemed to have so much fiscal space by the Commission has only confirmed the suspicions of many countries that they will be able to support their own industries.

Even some wealthier EU nations with ample fiscal space oppose the idea on principle.

Despite the fact that Thursday's summit would allow leaders to thrash out their positions, a number of diplomats argue that the real battle has just begun.

The European Council will revisit the topic in March, but the crux of the matter may occur at the EU summit in June, when the talk is expected to move to the delicate question of potential new EU money.

This argument promises to be lengthy and divisive.


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